Dividends Not Enough for Natural Gas Play

[1]“I own shares of Enerplus (NYSE:ERF[2]). Should I still hold onto it or sell it?”

Ah, this is perhaps the hardest question of all — whether to sell an old dog with fleas, or whether to wait and see if it has any new tricks.

For starters, let me clue you in to my simple philosophy on when to sell stocks: Just act like you never owned the company at all, then look at it like a new investment. At the current price, do you consider it a good investment with upside potential? Or is it rather ho-hum — or worse, an investment to avoid?

This is the great equalizer. Even if you are sitting on a huge gain and love your stock, if you look at it with cold logic and decide it’s overbought then head for the hills. Similarly even if you’ve tallied a huge loss and are reluctant to sell it, the harsh reality of further downside potential and limited upside will scare you out of further losses.

Let’s take a look at Enerplus, a big natural gas stock, as an example:[3]

Click to EnlargeThis stock’s performance over the last few years is ugly. In 2008 it was paying $4.75 annually in dividends and trading in the mid-$40 range for a yield over 10%. Now it’s down 70% from there to under $15 a share, and pays a mere $1.08 annually thanks to a series of dividend reductions. Even when you bake in the monthly payments, you’d be sitting on roughly 40% loss in ERF since before the financial crisis.

But under my “when to sell” guidelines that’s all academic, right? The real question is if ERF stock looks like a good buy right now and going forward.

And frankly, it doesn’t.

First, there’s the issue of soft natural gas prices. Though prices have firmed up in recent months, not long ago natural gas hit historic lows below $2 per million BTUs. That’s in large part because of a glut in natural gas driven by the advent of horizontal drilling and other techniques that make it easier to extract more gas from the ground.

On the other hand, recession in the U.S. and now in Europe has hurt energy demand. Even China’s voracious appetite is getting smaller.

It’s supply and demand in natural gas. Too much supply, not enough demand.

Enerplus has been gutted as a result. Its revenue dropped from $1.78 billion in 2008 to $1.10 billion last year. Earnings are even uglier, as periodic quarterly losses have resulted in EPS of just 62 cents last year.

Ouch.

What about the dividend, you say? Well let’s do the math again. Enerplus made a profit of 62 cents last year — and paid out 18 cents monthly for $2.16 in total dividends. That is not sustainable in the least.

Maybe that’s why it recently cut that payment in half to just 9 cents a quarter. (It’s in Canadian dollars so there’ a small differentiation in payouts due to currency exchange rates, but not enough to spend more time on than this brief note.)

And in case you’re hoping there’s wiggle room on the balance sheet, there’s a measly $1.5 million in cash in the bank and total debt of over $900 million.

So you tell me. Is this the kind of stock you want to invest in? Is this a reliable dividend play?

I hope you agree with me when I say that this stock has very little upside potential in the short term, and a whole lot of risk. So it’s not a good buy.

That means in my book, it’s a sell.

After all, let’s say you hang on and Enerplus ekes out a 12% gain in the next two years. Are you telling me it’s the only stock on Wall Street you can find to give that kind of performance? Are you convinced that it has more upside between now and then than a stock like Apple (NYSE:AAPL[4]) or even an oil major like Exxon (NYSE:XOM[5]) that could play a cyclical recovery for energy with more stability[6]?

I know it’s hard to let go of the money and turn a paper loss into reality. But even if you don’t lose any more cash, you’re wasting valuable time. Every moment you tread water in Enerplus, you’re missing out on other opportunities.

The worst case scenario is you move your money to another loser. But at least you took a shot.

That’s investing, my friends.

Perhaps the only reasonable thesis for sticking it out with Enerplus is if you believe in a natural gas surge. While that’s not likely in the near-future, it may be reasonable down the road. In that case I would recommend you seek out better alternatives to Enerplus that offer stability in the short term. How about natural gas MLPs like Enterprise Products Partners LP (NYSE:EPD[7]) or Linn Energy (NASDAQ:LINE[8])? They offer more reliable dividends if you’re looking for yield.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[9] Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.